Pembangunan Perumahan (PTPP IJ) Lowest Execution Rate Among Peers

9M18 results were weak as revenue fell 9.3% qoq in 3Q18 amid a record-low orderbook burn rate while 9M18 earnings fell 11.6% yoy on higher interest costs and opex. PTPP’s de-leveraging process will be longer than its peers’ as most of its loans are for financing landbanking activities. We cut 2018-19 revenue and earnings forecasts by 16%/11% and 27%/25% respectively on a lower burn rate and higher interest costs. Maintain BUY with a new target price of Rp2,800, pegged to 2019F PE of 8.1x (-1.5SD historical mean).

WHAT’S NEW

Weak 9M18 results on record-low burn rate. Pembangunan Perumahan (PTPP) delivered weak results in 3Q18 with revenue down 9.3% qoq/6.3% yoy to Rp5.82t, bringing 9M18 revenue to Rp14.78t (up by only 7.5% yoy) and representing only 53% of our full-year estimate. The weak revenue delivery in 9M18, which translates into a record- low burn rate of only 17.4%, was mainly due to the delayed land acquisitions for several huge projects such as the Patimban Port, Kulonprogo Airport and Manado-Bitung Toll Road. This once again raises concerns about the quality of its carryover contracts worth Rp52.5t. Meanwhile, 3Q18 earnings reached Rp395b (+22% qoq/-5.4% yoy), mainly helped by strong growth in joint operations (JO) profit and other income. This brought 9M18 net income to Rp875b, down 11.6% yoy and accounting for only 47% of our full- year estimate, on higher interest costs and surging personnel costs (+40.8% yoy).

Rising leverage in property division as a result of landbanking activities. PTPP’s net debt reached Rp5.97t in Sep 18, where around 60% of its debt came from its property arm, PT PP Property (PPRO IJ), which saw a surging leverage profile amid landbanking initiatives mainly in surrounding areas of the newly-operated Kertajati airport in West Java. Unlike other contractors who experienced rising leverage, mainly to pre-finance their turnkey projects that will complete in 2019, PTPP’s investment in landbanks will potentially see a longer payback period – depending on demand and development progress of the township. Hence, its de-leveraging process is expected to be prolonged. STOCK IMPACT

In-line new contracts achievement in 10M18 to support future burn rate. PTPP was among the best vs peers in achieving its new contract target as the company secured Rp35.3t in new contracts as of Oct 18, up 5.3% yoy and meeting 72% and 75% of the company’s 2018 target and our assumption respectively. This strong achievement will bode well for PTPP’s burn rate going forward following the company’s failure to demonstrate solid revenue conversions from carryover contracts in the past three years.

EARNINGS REVISION

We cut 2018-19 revenue forecasts on a lower burn rate assumption. We have lowered our 2018-19 burn rate assumptions to 21.2% and 22%, respectively. This has brought our 2018-19 revenue estimates down by 16.5% and 10.9%, respectively.

Our 2018-19 earnings forecasts are down 27%/25% and now 20%/15% below consensus. Aside from lower revenue estimates, we have raised our interest cost assumption amid a higher leverage profile which has resulted in 27%/25% earnings forecast cuts for 2018-19. Our 2018-19 earnings forecasts are now 20%/15% below consensus, mainly on higher revenue estimates as consensus’ 2018 revenue forecast implies that 4Q18’s earnings would more than double qoq (Rp11t) and we believe this is unachievable considering PTPP’s historically high quarterly revenue of only Rp7.7t. Meanwhile, consensus’ 2019 earnings assumes a net margin of 6.5%, a level that was historically achievable only when PTPP was in a net-cash position.

VALUATION/ RECOMMENDATION

Maintain BUY with a lower target price of Rp2,800. We use a lower PE of 8.1x which is -1.5SD to PTTP’s historical mean PE on 2019F EPS. PTPP is trading at a single-digit forward PE of 4.8x, which somewhat undemanding at -2.7SD historical mean given that PTPP is expected to see a 19% CAGR earnings in the next two years.